Retained Earnings

Definition - What does Retained Earnings mean?

Retained earnings are the profits that a company makes over a certain period of time that it keeps for itself to use to pay debts or to put back into the business. These earnings are the earnings that the company has leftover after it pays out dividends to its shareholders.

In the context of the law, companies have a duty to pay dividends to shareholders if they offer a dividend option. They must accurately report their retained earnings on their balance sheets.

Justipedia explains Retained Earnings

There is an important distinction between net earnings and retained earnings. Net earnings represent the total profit the company has made over a certain period of time. However, the company still must pay dividends to its shareholders if it offers them from this profit.

So, retained earnings offer a much better figure for the money that the company actually gets to keep and decide what to do with. For example, a company may take a million dollars of retained earnings and use it to hire new employees.